Whose Bailout? Put Main Street Before Wall Street

Main Street is the world of local businesses and working people engaged in producing and exchanging real goods and services—a world of real wealth. Wall Street as it now exists is a world of pure money in which the sole game is to use money to make money for people who have money.

Events of the past few weeks have exposed the danger of a financial
system devoted to reckless speculation that produces nothing of real
value and, as we are now being told, presents a risk to the whole
global economy. The Bush administration proposes handing $700 billion
to Treasury Secretary Paulson to disburse—without oversight or
review—to those who created the current mess. Spending what many
analysts believe will grow to at least a trillion dollars to prop up
this predatory system for a few more months, or even years, seems less
than a great idea, which hopefully makes this a teachable moment.

We
might start with the lesson that there is an essential role for
government. Market fundamentalists have long argued that markets freed
from governmental interference self-correct. We can now see clearly
that the more Wall Street freed itself from regulatory oversight, the
more its most powerful players manipulated markets and politics to
their personal benefit. The more reckless their risk taking became, the
greater the instability of the financial system, and the greater the
threat to the rest of the economy.

So what
would a healthy financial system look like? Let’s start with the
relationship between Main Street and Wall Street. Main Street is the
world of local businesses and working people engaged in producing and
exchanging real goods and services—a world of real wealth. Wall Street
as it now exists is a world of pure money in which the sole game is to
use money to make money for people who have money—a world of
speculative gains and unearned claims against the real wealth of Main
Street.

Money, an essential medium of
exchange, makes modern economic life possible. In our current money
system, the money that Main Street depends on to facilitate productive
economic exchange and investment is created when Wall Street’s private
banks issue loans. You might say that the business of Wall Street is
creating money. This does not in itself create wealth. Money is only an accounting chit useful as a medium of exchange.
Wealth creation is the business of Main Street. This suggests that the
only legitimate reason for the existence of Wall Street is to provide
an orderly flow of money to meet the needs of Main Street.

Wall
Street performed its appropriate tasks reasonably well so long as
public regulatory authorities put in place subsequent to the financial
crash of 1929 held it accountable to Main Street interests. As it
liberated itself from public oversight, however, Wall Street turned
from serving Main Street to preying on it to generate outsized
financial rewards for its biggest players. It created a mind boggling
variety of “heads I win, tails you lose” financial games.

It
used deceptive practices to encourage people to run up credit card and
mortgage debts far beyond their means to repay, and then hit the
victims with special fees and usurious interest rates as they
inevitably fell behind in their payments. To get the high risk
mortgages off their balance sheets, the banks sold them to brokers who
packaged them into tradable securities with inflated quality ratings.
The banks that made the decision to extend the bad credit collected
their fees and passed the risk on to others. Proceeds from the sale of
the overrated securities were used to finance more lending to
unqualified borrowers. Many of these overrated securities ultimately
ended up in the portfolios of retirement funds, passing the risk back
to Main Street workers and pensioners who had no voice in any of the
decisions involved.

Wall Street also found it
profitable to merge regulated banks with unregulated investment houses
to facilitate insider dealing and finance a proliferation of highly
leveraged hedge funds and private equity funds that specialize in
gambling with other people’s money using exotic financial instruments
no one fully understands.

The players and
their apologists claimed they were creating wealth, providing market
liquidity, increasing economic efficiency, and stabilizing markets. In
fact, they created and profited from financial and real estate bubbles
and debt pyramids that used borrowed money to create paper assets that
became collateral for more borrowing to create more paper assets to
justify compensation packages for themselves in the hundreds of
millions of dollars. It may be legal, but it is not wealth creation. It
is an act of theft made possible by abuse of the legally sanctioned
power of a private banking system to create money out of nothing and
direct it to use by financial predators engaged in expropriating the
real wealth of Main Street for exorbitant fees.

In
2007, the fifty highest paid private investment fund managers, averaged
$588 million in compensation—19,000 times as much as average worker
pay. They said they were worth it because they were so smart and
productive. Now that their bets don't look so good, they think Main
Street taxpayers should pony up to cover the losses of the firms they
created to generate these handsome management fees.

Rather
than seeking to restore the health of Wall Street’s predatory private
institutions, a proper plan would seek to rid Wall Street of its purely
predatory elements while dismantling and reassembling its useable
institutions to create a new system accountable to the needs of Main
Street. Here are some of the basics.

Hedge funds
and private equity funds pose great risks to society while performing
no beneficial function. They should be dismantled.

As
Senator Bernie Sanders has recently said, “If a company is too big to
fail, it is too big to exist.” Adam Smith, revered by many as the
founding prophet of capitalism, cautioned against any concentration of
economic power that might be used to avoid market discipline,
manipulate market prices, and extract unearned profits. He had a very
good idea. It’s an important market principle.

It
is time to revive anti-trust to break up all excessive concentrations
of corporate power and particularly the banking conglomerates that have
been fueling speculation in global financial markets. To meet the
financial needs of Main Street create a system of federally regulated,
community banks that fulfill the classic textbook function of acting as
intermediaries between local people looking for a secure place for
their savings and local people who need a loan to buy a home or finance
a business.

Proceeds from taxes on the
ill-gotten gains of those who created the financial mess can be used to
make whole the pensioners, home owners, and credit card holders the
system victimized.

I grew up believing that a
strong middle class is a foundation of democracy and the American
ideal. This would be a great time to get serious about a broader
legislative agenda to restore the middle class by restoring a
progressive tax system, raising the minimum wage, and assuring every
American has access to the basics of a decent life. And while we are
creating a tax code to favor Main Street over Wall Street we should
include provisions to discourage absentee ownership and speculation by
making them unprofitable.

Perhaps the most
important of all the needed reform measures is to make money creation a
public function and strip private banks of their ability to create
money out of nothing by issuing loans at interest against unsecured
demand deposits.

These are not small steps.
Their implementation would likely cause significant temporary
disruption, but no more than the disruption that inevitably lies ahead
if the current system of predatory finance remains in place. Use the
trillion dollars to help the people who are creating real wealth and
let the fat cat speculators take their lumps. Only a thoroughgoing
redesign of Wall Street offers prospect of a real solution. Anything
else is only a costly temporary band-aid.